Disputing A Foreclosed Mortgage Balance: What You Need To Know

Foreclosure is a legal process that allows lenders to repossess a home when the homeowner defaults on mortgage payments. In the US, the Department of Housing and Urban Development (HUD) has reported that the glut of foreclosures has automatically delayed the process, and the timeline varies from one state to another and from one mortgage company to another. If you have received a foreclosure notice, you can dispute the foreclosure if you think your lender made a mistake or has violated the law. You can also submit a complaint online or by calling a housing counsellor. If you have not yet received a foreclosure notice, you may be able to arrange to repay your past-due balance in small increments over several months to bring your loan up-to-date.

How do I dispute a foreclosed mortgage balance?

Understanding the foreclosure process

Foreclosure is a legal process that allows lenders to take ownership of and sell a mortgaged property to recover the balance of a defaulted loan. This occurs when a borrower defaults on their mortgage payments. The exact foreclosure process varies depending on the state and lender, but there are typically six phases:

Payment Default

The first step in the foreclosure process is the borrower defaulting on their mortgage payments. This usually occurs after a certain number of missed payments, typically at least 120 days or four months of missed payments. Some lenders may provide a grace period of around 15 days, after which a late fee may be charged.

Notice of Default

Before initiating foreclosure proceedings, the loan servicer must send a notice of default or a "breach letter" to the borrower. This notice gives the borrower a chance to get caught up on their payments or make a payment plan with the lender to avoid foreclosure. The breach letter will include the date by which the borrower must cure the default, usually at least 30 days from the date of the notice, and inform them of the consequences of failing to do so.

Notice of Trustee's Sale

After the borrower's fourth missed payment, the lender's attorneys may move forward with a foreclosure sale. The borrower will receive a notice of the sale in accordance with state and local laws. The amount of time between receiving the notice of sale and the actual sale will depend on state laws, and may be as quick as two to three months.

Trustee's Sale

The trustee's sale marks the official foreclosure of the property. The sale may be conducted in different ways, depending on state law. In a judicial foreclosure, the mortgage lender must file a suit in court. If the borrower cannot make their mortgage payments within a certain period, the property will be put up for auction by the local sheriff's office or court. In a power of sale foreclosure, the lender can manage the auction process without the involvement of the local courts or sheriff's office.

REO

After the trustee's sale, the property becomes a Real Estate Owned (REO) property, meaning it is now owned by the lender. The lender will then sell the property to recoup the money lent.

Eviction

The final phase of the foreclosure process is the eviction of the borrower from the property. If there is still a balance remaining on the loan after the sale of the property, this is called a deficiency balance, and the borrower may be held responsible for repaying this amount.

Your rights during foreclosure

If you are facing foreclosure, you have several rights that can help you navigate the process as smoothly as possible or even avoid it. These rights are based on federal law, state law, and the mortgage or deed of trust you signed when you took out the loan. Here are some key points to understand your rights during foreclosure:

Right to Notice

Before initiating foreclosure proceedings, your loan servicer or lender must send you a notice that your loan is in default. This notice is typically sent through the mail and is called a "breach letter". It will inform you of the default and provide a deadline, usually at least 30 days, to cure the default by paying the past-due amount, interest, late fees, and penalties. Receiving this notice gives you the opportunity to get caught up on your payments or work out a payment plan with your lender to avoid foreclosure.

Right to Redeem the Property

In all states, borrowers have the right to redeem their property before a foreclosure sale by paying off the full amount of the loan, including any fees and expenses. Some states even allow borrowers to buy back the property after the foreclosure sale by reimbursing the buyer. This right to redeem allows homeowners to retain ownership of their property by fulfilling their financial obligations.

Right to Reinstatement

Many mortgages and deeds of trust provide borrowers with the right to reinstate their loan. This means that you can catch up on your missed payments, including any penalty fees, in a single lump-sum payment and then resume your regular monthly payments. Check your loan documents for a reinstatement clause, typically titled "Borrower's Right to Reinstate After Acceleration," to understand if and how you can reinstate your loan.

Right to Challenge the Foreclosure

You have the right to challenge the foreclosure if you believe your lender has made a mistake or violated the law. Foreclosure is a rigorous legal process, and you can defend yourself by asserting your rights and ensuring that your lender has followed all the necessary procedures. If you identify any errors or violations, you may have grounds to dispute the foreclosure in court.

Right to Mediation

Some states, counties, and cities offer property owners facing foreclosure the right to participate in mediation. Mediation provides an opportunity to meet with your lender and an impartial mediator to discuss alternatives to foreclosure, such as loan modifications, short sales, repayment plans, or deeds in lieu of foreclosure. This process can help you explore options that may better suit your financial situation.

Right to Surplus Funds

If your foreclosed property sells for more than what is owed on the loan and any other liens on the property, you have the right to receive the extra money generated from the sale. This surplus represents the excess proceeds beyond what is required to pay off your loan and associated costs.

It is important to remember that your rights during foreclosure may vary depending on your jurisdiction and specific circumstances. State laws can provide additional protections, so it is advisable to consult with a local foreclosure lawyer or a HUD-approved housing counselor to understand your full range of rights and options.

Foreclosure scams to watch out for

Foreclosure scams are a growing problem that could cost you thousands of dollars or even your home. Here are some common scams to watch out for:

Upfront Fees

Scammers often pretend to be foreclosure consultants and target homeowners who are behind on their mortgage payments. They may guarantee to 'save' your home or lower your mortgage, usually for a fee, pretending that they have direct contact with your mortgage servicer. However, foreclosure consultants are prohibited by law from collecting money before services are performed. Only your mortgage servicer has the discretion to grant a loan modification, so no third party can guarantee or pre-approve your application.

Transfer of Title or Sale of Home

Some scammers may ask you to sign over the deed to your property or sell your house to them, promising to "rescue" you from foreclosure. They may suggest that you can then rent the home from them at a low rent until you can afford to buy it back. However, this is a scam to convince homeowners they can stay in the home, but they may later be evicted and lose their home.

Sending Payments to Third Parties

Scammers may also instruct you to send your mortgage payments to someone other than your lender or loan servicer. They may claim that they will handle the payments to your lender, but this is often a way for them to pocket the money and leave you in default on your loan.

Suggesting You Stop Making Payments

Some scammers may advise you to stop making your mortgage payments altogether, claiming that they can negotiate a better deal with your lender. However, this will only hurt your credit and put you at greater risk of foreclosure.

Offering Quick Fixes or Guarantees

Be wary of anyone who offers a quick fix or guarantees that they can save your home. These scams often prey on homeowners who are desperate for a solution and may involve deceptive tactics to obtain ownership of your home for a fraction of its market value.

To protect yourself from foreclosure scams, it is important to work closely with your lender or a HUD-approved housing counselor to resolve your financial situation. Remember that real help is free, and you should never have to pay upfront fees for assistance.

How to respond to a foreclosure notice

If you've received a foreclosure notice, the first thing to do is to carefully read through the mail. This is important because foreclosure notices are sent through the mail, and you need to know what you're up against. You should also be on the lookout for any certified or registered mail.

The next step is to decide if you want to fight the foreclosure by responding to the summons. If you choose not to respond to the foreclosure summons, the court will enter a default judgment, and you will automatically lose the case. The plaintiff will then be granted whatever was requested in the initial complaint.

If you decide to respond to the summons, you will need to file an answer to contest the lawsuit. You will need to meet the deadlines outlined in the summons. You should also be aware of foreclosure scams, which may involve people demanding a fee for foreclosure counselling or suggesting that you stop making mortgage payments.

You may want to consider hiring a foreclosure defence attorney to help you navigate the complex foreclosure law. An attorney can advise you about your legal rights and help you enforce those rights. They can also tell you about different loss mitigation options, like getting a loan modification, or whether you should consider filing for bankruptcy.

If you want to avoid foreclosure, you may be able to arrange to repay your past-due balance in small increments over several months to bring your loan up-to-date. You could also discuss a short sale option with your lender, which means the lender accepts less than the full amount for your loan payoff.

Options to dispute the foreclosure

If you want to dispute a foreclosure, you have several options, depending on your circumstances and the stage of the foreclosure process. Here are some strategies to consider:

Repayment Plan

You may be able to arrange to repay your past-due balance in small increments over several months to bring your loan up-to-date. This option is best if you've missed a few payments but haven't yet received a foreclosure notice. Contact your loan servicer to discuss this option and try to avoid foreclosure.

Forbearance

In this option, your payments could be reduced or suspended for a certain period, after which you can repay the missing payments with incremental sums or a lump sum. This can buy you some time to get your finances in order and avoid foreclosure.

Loan Modification

This is a permanent change to your loan, such as reducing the interest rate or increasing the repayment term. This option can make your payments more manageable and reduce the risk of foreclosure.

Short Sale

If keeping your home is not a priority, you can discuss a short sale with your lender. In this case, the lender agrees to accept less than the full amount owed on your loan. While this option may not allow you to keep your home, it can help you avoid the full financial impact of foreclosure.

Deed in Lieu of Foreclosure

This option involves voluntarily transferring the title to your lender. This strategy can be quicker and less damaging to your credit score than a foreclosure.

Government Programs

You may be eligible for government programs that offer loan modifications or refinancing options, even if you owe more than your home's current value. These programs can provide much-needed relief and help you avoid foreclosure.

Bankruptcy

Filing for bankruptcy can help you keep your home temporarily, as the foreclosure process is legally stopped with an "automatic stay" once you file. However, the foreclosure can be reopened after the bankruptcy is complete or if the lender obtains legal permission. Bankruptcy can provide some breathing room but may not be a long-term solution.

"Produce the Note" Strategy

In some cases, homeowners have successfully delayed foreclosure by demanding that their lender provide proof of ownership of their loan. As loans are often sold between lenders, this can buy you some time as it may take a while for the lender to track down the necessary paperwork.

Legal Action

Depending on your state's laws, you may be able to hire an attorney and challenge the foreclosure in court. You may have a case if the lender failed to follow proper procedures, made errors, or violated the terms of your mortgage contract or state law. A good foreclosure attorney will be able to guide you through your specific options.

Frequently asked questions